Crypto mining stocks have plummeted amid a red-hot inflationary environment, a trend that’s likely to continue as energy-efficient means of minting digital currency tokens continue to overtake traditional, energy-heavy crypto mining activities.
Core Scientific (CORZ) has plunged 79% this year, closing at 1.81 Friday. Bitfarms (BITF) has been hurt almost as badly, plummeting 75% and closing at 1.24. Not far behind, Riot Blockchain has nosedived 67%, closing at 6.69.
The broader market has also slumped since stocks rebounded last year. The S&P 500 has fallen roughly 15% since September of 2021, weighed down by a series of Central Bank rate hikes designed to corral decades-high inflation.
Investors have retreated from the once-hot crypto mining industry — an industry in which people or teams of people called miners run specialized computers that run computer programs tasked with solving complex cryptographic puzzles on networks called blockchains for a reward, which is some amount of crypto. In mining, whichever miner or mining team can solve the puzzle the fastest is rewarded with the cryptocurrency tokens, which they can then sell to turn a profit. But, a shift in the manner in which digital tokens are “mined,” has slashed demand for miners across the wider crypto industry. Also contributing to the retreat is sky-high energy inflation, which has slowed production rates, and the broader crypto market downturn, which has further crunched mining businesses’ profit margins.
“Public miners are still dumping their holdings at a higher rate than their production rate,” said Jarand Mellerund, an analyst at Arcane Crypto.
In November of 2021, bitcoin soared to $69,000 — the token’s highest price to date. What came next was a digital gold rush. Dazzled by soaring crypto prices, institutional investors rushed to snap up stakes in the market for digital assets and invest in the companies that produced them.
But just six months after crypto soared to new highs, two major tokens, Terra and Luna, crashed, triggering a market implosion that sent bitcoin, the largest cryptocurrency by market cap, spiraling to a third of its all-time-high value.
Core Scientific (CORZ) stock price at market close
In the wake of the crash, Core Scientific Inc., Bitfarms and Riot Blockchain Inc. suffered large losses. The crash led many investors to withdraw their crypto holdings from exchanges and abandon crypto-related stocks as they reinvested their funds in less volatile stores of value like gold, forcing crypto mining companies to slow production and dump their crypto holdings so they could pay high-interest-rate loans on mining equipment bought during the crypto bull run.
“Public miners are still dumping their holdings at a higher rate than their production rate,” said Jarand Mellerund, an analyst at Arcane Crypto.
The crypto mining industry took another hit when, just four months later, the Ethereum blockchain, the second largest network for crypto transactions by user count, successfully transitioned from a proof-of-work, or energy-intensive, token creation model, to a proof-of-stake, or more eco-friendly, model.
That shift, known as the “Merge,” phased out mining on the Ethereum blockchain, forcing roughly one million people running more than $10 billion worth of equipment to begin mining crypto on other networks, or blockchains, whose native tokens are far less profitable. As a result, miners who switched to mining on other, smaller blockchains, like Ethereum Classic, now operate at negative 30% to 40% of gross profit, meaning the cost of production, including mining equipment purchases and energy costs, now exceeds miners’ profits from the cryptocurrencies they mine.
Since February, skyrocketing energy prices, especially in the heavily miner-occupied Northeast, have also compressed mining companies’ profit margins. According to the Bureau of Labor Statistics’ August CPI report, the energy inflation index rose 23.8% over the past year. As a result, crypto mining companies have turned to selling their mined cryptocurrency stashes to offset their razor-thin profit margins.
In June, Core Scientific offloaded $167 million in bitcoin, nearly three-quarters of its total holdings. Around the same time, Bitfarms sold half of its bitcoin to the tune of $62 million to pay its debts. Riot Blockchain, meanwhile, has reportedly steadily liquidated its mined bitcoin all year, although the exact amount sold remains unclear.
How companies stretch their margins and recoup money lost in bull-run splurges will separate the sector’s winners and losers, influencing stock prices, says Owen Lou, Director of Equity Research at Oppenheimer & Co.
“In hindsight, we see mining companies were massively expanding operations, ordering new machines [during the bull run], but making those purchases proved to be a bad decision once bitcoin [speculative prices] fell and that’s something they’ll have to deal with,” Lau said.
Some investors like Dominiki Kurz, a medical student from New York, are less confident crypto mining companies will be able to cope with the downturn, but continue to hold for fear of selling at a loss.
“When I heard that [the mining companies] had all those legal and financial issues, I thought ‘ok maybe I should move my money,’ but the stock is already down and I don’t want to sell at a loss so I’m just keeping it for now,” said Kurz.
Although some investors continue to hold mining stocks, it’s likely Core Scientific, Riot Blockchain, and Bitfarm’s stock prices will continue to plummet as the Fed’s efforts to pump the brakes on inflation have only modest effects on energy prices. In addition, the Ethereum blockchain’s transition to a mechanism of generating crypto that eliminates the need for crypto miners may inspire other blockchains to make the same transition, further diplacing miners, reducing their profits and driving stock prices down further.